3 Things You Need to Know About Starbucks' Record-Breaking Quarter

After coming off its best year in history, Starbucks (NASDAQ: SBUX  ) posted a record $4.2 billion in sales for its fiscal first quarter of 2014. 

The coffee chain's earnings came in higher than management's projections; it had projected $0.67 to $0.69 per share and actually earned $0.72 per share.

Starbucks' bottom-line performance was great, but the most useful information for investors is found in the paragraphs below the earnings headline. By focusing on the right numbers, investors can get a better idea of how Starbucks will perform in 2014 and beyond.

Three key numbers in Starbucks' earnings release
Three key first-quarter numbers indicate Starbucks' progression toward its growth targets: number of net new stores opened, same-store sales growth, and operating margin. Starbucks' performance on each of these factors paints a picture for its likely performance the rest of the year.

The first number -- net new stores opened -- is encouraging for Starbucks bulls. The company plans to add 1,500 stores in fiscal 2014; it opened 417 stores -- a little more than one-fourth of its target -- in the first quarter. Starbucks needs to keep opening new stores to meet its aggressive double-digit revenue growth target.

The first-quarter results show that the company's expansion plans are still on track; in addition to opening 417 new stores, it grew revenue 12% to a record $4.2 billion in sales. But the second metric, same-store sales growth, came in lower than investors would have liked.

Same-store sales growth is crucial to Starbucks' continuing value creation, especially in the saturated United States market. Some have estimated that 80% of Americans live within 20 miles of a Starbucks. With that many locations already open in the country, the only way to grow is to increase sales per store. Starbucks is trying to do that by adding La Boulange sandwiches and baked goods to its U.S. stores, which may drive more traffic during the lunch hour and increase its average ticket price.

The early results are not as good as expected. Starbucks' U.S. same-store sales grew 8% during the fourth quarter of 2013 but grew just 5% in the first quarter of 2014. Analysts estimated a 6.4% same-store sales increase for the Americas segment in the quarter, and investors would have liked it to have matched the 8% same-store sales growth seen in the prior quarter. The slowdown in growth suggests that the La Boulange rollout has not yet driven large traffic or ticket-price increases, but investors should wait until the end of calendar year 2014 -- when La Boulange has been available in all company-owned U.S. locations for at least six months -- before writing off the new items.

Starbucks came in right on target for the final key factor: operating margin. It posted a 2.6 percentage-point improvement from the prior-year quarter, coming in at 19.2%. The company's operating margin has historically been much lower, but it will likely increase over the course of the year due to a higher mix of licensed stores.

Licensed stores increase Starbucks' operating margin because the royalties fall straight to the bottom line. The Americas division is 60% company-operated stores and 40% licensed stores; it generates a 24% operating margin. On the other hand, 77% of locations in the China-Asia Pacific region are licensed stores; the segment earns an operating profit in excess of 30%.

Source: Starbucks 2013 10-K and Q1 2014 earnings release.

As Starbucks adds more licensed stores in Asia, its overall operating margin will increase. If it can hit its revenue target and increase its profit margin, the company's earnings will grow at a double-digit rate that could justify its high stock price.

Foolish takeaway
One quarter does not make or break a company, but it can give important insights into the company's longer-run prospects. Starbucks' first quarter indicates that its store expansion and profit margin are on the right track, but its La Boulange introduction has yet to capture Americans' undivided attention. As 2014 rolls on, investors should keep an eye on U.S. same-store sales growth to see if the new food options are game-changing or just a sideshow.

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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8/28/2015 4:00 PM
SBUX $55.63 Down -0.32 -0.57%
Starbucks CAPS Rating: ****